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Home > The NLS Blog > Apple to Face Competition Law Scrutiny in India – Towards a New Platform Pricing Paradigm?

Dr. T. S. Somashekar

October 22, 2021

Apple to Face Competition Law Scrutiny in India – Towards a New Platform Pricing Paradigm?

“Welcome to the garden, we’ve got fun and games
We got everything you want …, we know the names
We are the people that can find whatever you may need…
If you want it you’re gonna bleed but it’s the price to pay…
You can taste the bright lights but you won’t get there for free…”

(An adapted and abbreviated version of the 1987 hit song – “Welcome to the Jungle” by Guns n Roses, 1987)1

I. The Background – Snowballing Scrutiny, Everyone Wants a Bit(e) of the A(pple)ction

In a recent complaint to the Competition Commission of India (CCI), Apple Inc has been accused of abusing its dominance by forcing app developers, who have their apps hosted on the iOS platform, to use its own ‘in- app purchase’ mechanism (IAP) and pay an ‘excessive’ 30% transaction fee. This is not an isolated complaint against Apple as it faces a series of similar suits across the globe, particularly aggravated by Apple’s ‘closed’ iOS ecosystem. Apple’s high degree of vertical integration has led to the description of this ecosystem as ‘walled garden’2– a garden to which it alone determines which app/software can be used (gatekeeper) and by virtue of dependence, possibly tends to keep its users locked-in. Unlike Google’s licensed Android OS, the iOS is not available in the market for other smartphone manufacturers.

The current case is that, unlike the earlier investigations which were concerned with exclusionary abuses, including predatory pricing, or merger related issues, concerns potential ‘excessive pricing’ which involves far more complexities of allocating common costs to different segments.

I.I Different Agencies, Different Strokes – Time for Coordinated Action?

Among the competition agencies currently investigating Apple’s App Store policies include the EU Commission (EUC), which is investigating a complaint related to IAP fees and ‘anti- steering’ contractual rules, specifically related to music-streaming and ebook/audiobook apps3 and, the UK Competition and Markets Authority (UK-CMA) which is examining a civil suit on similar grounds4. The Australian Competition and Consumer Commission (ACCC) has initiated a broad-based inquiry into digital platform services, and has found both, Apple and Google, dominant on their respective mobile operating systems (OS), thereby, giving them ‘significant market power’ in the marketplace for app distribution5. It has recommended transparency with respect to alternate payment mechanisms for IAP’s, but, has refused to be drawn into the debate concerning the excessiveness of IAP fees6. In a very recent settlement with the Federal Trade Commission (Japan), Apple agreed to modify certain restrictive App Store guidelines and allow for in-app links to outside payments portals for ‘reader’ apps.7 To some extent this amounts to a concession in a category of apps where Apple is facing resistance from important competing apps. Netflix and Spotify (a complainant in the EUC case), both reader apps and competitors to Apple’s own digital services8 i.e., Apple TV+ and Apple Music respectively, pulled out from the iOS IAP payment option, in retaliation against Apple’s fees9. Netflix was the single largest IAP fee grosser for iOS, with about $256 million (2018)10 and, Spotify contributed a handsome $156 million (2015-18)11. It remains to be seen if Apple’s intention to apply the settlement globally12 will mollify the EUC. Nevertheless, it still excludes a large number of apps and, the cases in UK and India are not specific to any particular category of apps.

Apart from ex-post antitrust scrutiny, Apple faces a host of state regulatory action. The South Korean government, besides looking askance at unilateral deletion of apps or undue delay in their approval, has banned the imposition of their own IAP by Apple and Google13. While Google has responded by saying that IAP revenue allows it to provide the Android OS for free14, trying to draw attention to the economic model of platforms, Apple appears more intransigent by refusing to reverse its deletion of a popular South Korean gaming app ‘Fortnite’, owned by Epic, which had sought to bypass Apple’s IAP by introducing an alternate payment mechanism.15 Acceding to Epic, it may have large revenue consequences for Apple, given that gaming apps are the largest source of app revenue at $47 billion (2020).16

But, in another very recent development, in Epic Games Inc v Apple Inc, a US District Court ruled that Apple should allow app developers to provide links to external websites for payments.17 While there appears unanimity among the agencies/courts that have completed their reviews/investigations or reached a settlement, that Apple needs to change its App Store terms to allow for alternate payment options, there is still divergence with respect to how exactly this needs to be done. While some want this to be applied to all apps, others are concerned only with reader apps. Further, there are differences in both defining the relevant product market and findings related to whether Apple is ‘dominant’ or possesses ‘substantial market power’. In Epic Games v Apple Inc., the judge did not find Apple to have monopoly power (‘substantial market power’) in the market for digital mobile gaming but only found its anti-steering provisions to be creating information asymmetry and hence potential, lock-in effects and exploitation of consumers.18 The ruling appears more like an ex-ante regulatory finding rather than a response to antitrust violation with the judge validating Apple’s business model and the need for earning returns to intellectual property. The ACCC, on the other hand, found both Apple and Google to be dominant, having ‘significant market power’ in a differently defined market i.e., the marketplace for distributing apps.19 In a comparable case, Google Android, the EUC found ‘Android app stores’ to be a relevant product market, as it did not find Apple iOS to be a constraint on licensed Android OS.20 This could be an indication of where the EUC may be headed, although, there may be some divergence given the ‘closed’ nature of iOS. Given the significant global homogeneity in policies adopted by Apple, and other tech companies, it may perhaps be time for major competition authorities to arrive at a coordinated investigation and a standardized approach with, perhaps, some geographically differentiated aspects, to the regulation of these firms. This would save transaction costs of each agency having to investigate separately, the confusion of differential approaches by each country and besides saving on time overruns in investigations. But the Neo Brandeisians may have a different idea.

I.II The Neo -Brandeisian assault

In the US, the House Judiciary Committee, of the House of Representatives, led a sweeping investigation into potential anticompetitive behavior in digital markets, focused on Apple, Google, Facebook and Amazon, and found them to be abusing their market power arising out of their position as ‘gatekeepers’ to different important digital distribution channels.21

The Committee found both Apple and Google to be dominant in their respective app stores22 and called for regulations that would eliminate ‘self-preferencing’ and other abuses that affected competition.23 But of significance are a series of recommendations, that are based on the conclusion that the current Antitrust laws are both inadequate and improperly enforced, by way of excessive focus on ‘consumer welfare’ as the guiding principle.24 The Committee suggests both institutional and substantial law reforms including: rebasing enforcement on the ‘antimonopoly’ intent of legislations; emphasis on ‘overenforcement’ rather than ‘underenforcement’; protection of the ‘competitive process’, start-up’s, potential and, nascent firms; a more hawkish view of their acquisitions/mergers by/with the large tech firms and; removing the requirement of proving ‘recoupment’ in predatory pricing cases in digital markets.25 We are yet to see any enforceable action based on these recommendations, which have a heavy tilt towards the, so-called, Neo-Brandesian School (NBS) of thought, which inherently suspects bigness and the use of consumer welfare standard (CWS).26 But, the appointment of two prominent proponents of this school of thought, Lina Khan, as the Chairperson of the Federal Trade Commission (FTC) and, Tim Wu, to the National Economic Council, by the US government signals a strong intent in this direction.27 However, the primary arguments of this school have met with strong criticism.28 Some have termed it as ‘hipster’ antitrust or ‘populist antitrust’ which, unwisely, seeks to solve a range of social, economic and political issues through the instrument of antitrust regulation.29 To sum up some of these responses: the NBS approach does not adequately acknowledge the influence of modern Industrial organization theory (including, game theory) and empirical studies which departs substantially from the Chicago School by establishing how anticompetitive strategies are both possible and profitable particularly under conditions of information asymmetry; CWS is an end objective of ‘competitive process’ and not independent of it and besides it provides a more transparent economic objective as compared to political decision making which is open to ‘capture’; departing from conduct based analysis and relying only on size (no-fault antitrust) opens up decisions to false positives which may have larger consequences particularly with respect to platforms; the empirical literature used to show that the US faces increasing industrial concentration and resulting higher profit margins, due to slack antitrust enforcement, are faulty in methodology and data and, in certain circumstances even wrongly inferred and; it is not even a correct reflection of Judge Brandeis’s ideas who, although in favour of small business, preferred economic methods and was less interventionist himself. At the same time there has been recognition of certain weaknesses in the current enforcement approach. Hovenkamp (2019), while supporting the CWS, points out that current enforcement, among others, needs to reexamine the ‘recoupment test’ in predatory pricing cases.30 Werden (2018), while disagreeing with the need for multiple objectives based antitrust, agrees that excessive focus on effects can at times lead to the neglect of competitive process itself.31

These debates and decisions are bound to have significant ramifications for future pricing strategies and other practices of both Apple and Google (Android OS) specifically and, other two-sided or multi-sided platforms, generally. Platforms, in their urge to expand their market size and increase their market power, or tip markets in their favour, by virtue of network effects, often adopt ‘zero’, below marginal cost or even negative pricing32 for users on one side. By charging the other side(s), based on their own-price elasticity and intensity of demand side externalities, theoretically, they have a rational profit maximizing strategy.33 Addressing pricing issues on only one side of the platform can lead to incomplete analysis and possible false positives. In other words, defining the appropriate relevant market for two(multi) sided platforms is important, but at the same tome tricky, particularly as the somewhat settled ‘transaction’ and ‘non-transaction’ platform differentiation approach adopted by agencies, so far, faces new theoretical challenges. The CCI is no stranger to complaints related to platforms and of particular interest would be its decision in the Android OS case, which could provide insights into its definition of relevant markets for apps/app stores and competitive constraints imposed by the iOS – although we need not expect symmetricity in relevant market definition in the Apple case.34 Nevertheless, the significance of this sector cannot be underestimated with app downloads, in India, growing at a scorching pace of 190%, accounting for 14% of the 218 billion apps downloaded globally (2020)35 and a total app-based revenue of approximately $1.4 billion (2021)36.

About the Author:

Dr. T S Somshekar is Professor of Economics and Director for the Centre for Competition and Regulation, National Law School of India University, Bengaluru. This is the first of the three-part series by Dr. T S Somashekar being released on The NLS Blog.

Endnotes:

  1. The song’s lyrics has an uncanny (literal) resemblance to the nature of the complaint against Apple Inc. Its actual reference was supposedly the attraction of New York city for those aspiring to make it big and the cost involved.
  2. Joanna Stern, “iPhone? AirPods? MacBook? You Live in Apple’s World. Here’s What You Are Missing”, WSJ, June 4, 2021; The US court refers to the same term in its decision in Epic Games, Inc. v. Apple Inc., Case No. 4:20-cv-05640-YGR (N.D. Cal. Sept. 12, 2021) p.3
  3.  “Antitrust: Commission opens investigations into Apple’s App Store rules” EUROPEAN COMMISSION (June 16, 2020).
  4.  “Apple accused of breaking UK competition law by overcharging for apps” THE GUARDIAN (May 11, 2021).
  5.  “Digital platform services inquiry, Interim report No. 2 – App marketplaces”, AUSTRALIAN COMPETITION AND CONSUMER COMMISSION, (March 2021) p.4.
  6.  Ibid p. 13.
  7.  According to Apple, reader apps are “previously purchased content or content subscriptions for digital magazines, newspapers, books, audio, music, and video”; “Closing the Investigation on the Suspected Violation of the Antimonopoly Act by Apple Inc.” Japan Fair Trade Commission (September 2, 2021) (accessed on September 20, 2021); “Japan Fair Trade Commission closes App Store investigation” APPLE NEWSROOM (September 1, 2021).
  8. David Curry, “Apple Music Revenue and Usage Statistics (2021)” (Updated: June 2, 2021).
  9.  Sarah Perez, “Netflix stops paying the ‘Apple Tax’ on its $853 in annual iOS Revenue” TECHCRUNCH (January 1, 2019).
  10.  Supra n. 8 (David).
  11.  Shona Ghosh, “This chart shows why Spotify is desperate for every dollar it can get back from Apple,” BUSINESS INSIDER (March 14, 2019).
  12.  Supra n. 7 (Japan Fair Trade Commission)
  13.  Jiyoung Sohn, “Google, Apple Hit by First Law Threatening Dominance Over App-Store Payments”
    WALL STREET JOURNAL (August 31, 2021). Available at https://www.wsj.com/articles/google-apple-
    hit-in-south-korea-by-worlds-first-law-ending-their-dominance-over-app-store-payments-
    11630403335 (accessed on September 22, 2021)
  14.  Supra n. 8 (David).
  15.  Siladitya Ray, “Epic Wants Fortnite Back on South Korean App Store After New Legislation, Apple Says No”
    FORBES (September 10, 2021).
  16.  Mansoor Iqbal, “App Revenue Data (2021)” BUSINESS OF APPS (Updated: August 4, 2021).
  17.  Case No. 4:20-cv-05640-YGR (N.D. Cal. Sept. 12, 2021).
  18.  Ibid pp. 158-160.
  19.  Gregory J. Werden and Luke M. Froeb, “Antitrust and Tech: Europe and the United States Differ,
    and It Matters” (August 26, 2019).
  20.  AT.40099 – Google Android, EU Commission (18/07/2018).
  21.  “Investigation of Competition in Digital Markets” Majority Staff Report and Recommendations, Subcommittee on Antitrust, Commercial and Administrative Law of the Committee on the Judiciary (2020) p. 11- 16.
    The Committee found each of them acting as ‘gatekeepers’ or enjoying ‘dominance’ in different segments: Facebook in social media; Google in internet search and online advertising; Amazon in online retailing and Apple in the iOS operating system which gave it ‘monopoly’ market power in the app store market.
  22.  Ibid at pp. 97 – 99.
  23.  Ibid at p. 20.
  24.  Ibid at p. 20 – 21.
  25.  Ibid at p. 390 – 397.
  26.  See, Mr. Justice Brandeis, “Competition and Smallness: A Dilemma Re-Examined” 66 YALE L.J. (1956): The school, apparently, looks to go back to the actual objective of antitrust laws which they believe are well reflected in the late Justice Louis D. Brandeis’s views who believed that concentration of industrial power among large corporations could threaten democratic the process and that the answer to that was more small firms
  27.  Two important works that have propounded the ideas of Judge Brandeis, in recent times, attracting the name ‘New/Neo Brandeis School’, include:
    Tim WU, “The curse of bigness: antitrust in the new Gilded Age” COLUMBIA GLOBAL REPORTS (2018); and Lina M. Khan, “Amazon’s Antitrust Paradox” 126 YALE L.J. (2016): Lina Khan, attempts to explain and clarify their position in: Lina Khan, “The New Brandeis Movement: America’s Antimonopoly Debate” 9(3) JOURNAL OF EUROPEAN COMPETITION LAW &; PRACTICE (March 2018) pp. 131–132;
    See also, Daniel Michaels and Brent Kendall, “U.S. Competition Policy Is Aligning With Europe, and Deeper Cooperation Could Follow” THE WALL STREET JOURNAL (July 15, 2021).
  28.  Seth B. Sacher and John M. Yun, “Twelve Fallacies of the ‘Neo-Antitrust’ Movement” 26(5) GEORGE MASON LAW REVIEW George Mason Law & Economics Research Paper No. 19-12 (2019); Herbert J. Hovenkamp, “Is Antitrust’s Consumer Welfare Principle Imperiled?” 45 J. CORP. LAW 101 (2019); A.D. Melamed, and N. Petit,“The Misguided Assault on the Consumer Welfare Standard in the Age of Platform Markets” 54 REV. IND. ORGAN. 741 (2019)
  29.  Joshua D. Wright, Elyse Dorsey, Jan Rybnicek and Jonathan Klick, “Requiem for a Paradox: The Dubious Rise and Inevitable Fall of Hipster Antitrust” 51(1) ARIZONA STATE LAW JOURNAL 293 (Spring 2019)
  30.  Supra n. 28 (Hovenkamp)
  31.  Gregory J. Werden, “Back to School: What the Chicago School and New Brandeis School Get Right” (September 4, 2018).
  32.  Rewards offered by Google Pay, Paytm for using their e-wallets can be cited as an example. Of course, it can also be argued that users pay by means of providing transaction and other personal data
  33.  For an understanding of the elasticity rules for pricing different sides of the platform, the pioneering work of Rochet and Tirole offer us guidance. See, J C Rochet and J Tirole “Platform Competition in Two-Sided Markets,” 1 JOURNAL OF THE EUROPEAN ECONOMIC ASSOCIATION 990 (2003). J.C. Rochet and J. Tirole, “Two-Sided Markets: A Progress Report” 37 RAND JOURNAL OF ECONOMICS 645 (2006)
  34.  Kshitiz Arya and another v. Google LLC and others, Case No. 19/2020 (CCI) [Order Dated 22/06/2021] Umar Javeed & Others v. Google LLC & Other., Case No. 39/2018 (CCI) [Order Dated 16/04/2019]
  35.  “India accounted for about 14% of 218 billion global app installs in 2020”, ECONOMIC TIMES (January 19, 2021).
  36.  Digital Market: Apps (India), Statista.
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